IFR 03.21.2020

18 International Financing Review March 21 2020

BARCLAYS CFO TUSHAR MORZARIA, P

“Well, the world has moved on since the full

year. It feels like a lifetime ago at the moment”

Fed reboots crisis-era tools to combat virus fallout

The US FEDERAL RESERVE rebooted three credit

crisis-era lending programmes for banks and

7ALLû3TREETSûTOPûBONDûlRMSûINûANûEFFORTûTOû

restore liquidity to a credit market undergoing

severe strains due to the coronavirus pandemic.

The Fed may bring back even more of these

crisis-era loan facilities to free bank and dealer

balance-sheets in its attempt to encourage

them to lend to consumers and businesses as

risk of a recession has increased.

“The monetary policy response that has

TAKENûPLACEûWILLûDElNITELYûHAVEûAûPOSITIVEûEFFECTû

ONûlNANCIALûMARKETSûGENERALLYvûSAIDû*ASONû

Merrill, investment specialist at Penn Mutual.

Other major central banks also embarked

on dramatic steps to support markets

rocked by the global health crisis.

The ECB last week pledged to boost asset

purchases to about €1.1trn (US$1.2trn) this

year, while the Bank of England increased

its bond purchase programme by £200bn to

£645bn.

#ASHûAVAILABILITYûINûTHEûlNANCIALûSYSTEMû

has dwindled in recent days.

Investors scrambled to stockpile cash and

dumped stocks, corporate bonds and other

risky assets, exacerbating the imbalance

across funding markets.

Companies such as Ford and AB InBev

drawing down their credit lines diminished

the capability of banks to extend lending in

capital markets.

Despite the massive policy response,

lNANCIALûMARKETSûREMAINEDûTURBULENTûASû

stock markets sagged into bear territory and

credit spreads ballooned to their widest

LEVELSûSINCEûTHEûlNANCIALûCRISIS

FED REOPENS CRISIS PLAYBOOK

The Fed’s three recently revived lending

programmes are part of its growing suite of

policy tools that it has deployed this month.

This was reminiscent of what the Fed did

in the aftermath of the collapse of Lehman

Brothers more than 11 years ago.

On March 15, US policymakers slashed short-

term rates by 100bp to near zero and said it

planned to buy at least US$500bn in Treasuries

and US$200bn in mortgage-backed securities.

Two days later, the Fed restarted the

Commercial Paper Funding Facility to

unfreeze the US$1.1trn short-term debt

sector on which some companies rely for

cash to fund payrolls and inventories.

It relaunched the Primary Dealer Credit

Facility which permits primary dealers, or

THEûûlRMSûTHATûDOûBUSINESSûDIRECTLYûWITHû

the central bank, to borrow from the Fed by

posting as collateral a wide range of

investment-grade debt securities and even

certain types of equity securities.

And the Fed once again became a

backstop for US$3.8trn money fund

industry, which is a major buyer of CP.

Through the Money Market Mutual Fund

Liquidity Facility, it directed the Boston

Federal Reserve to make loans secured by

short-dated, high-quality assets purchased

BYûELIGIBLEûlNANCIALûINSTITUTIONSûFROMûMONEYû

market mutual funds.

While these “alphabet soup” programmes,

often referred to by their acronyms, would

HELPûMOVEûCREDITûACROSSûTHEûlNANCIALûSYSTEMû

their intended effect may take some time to

WORKûASûMARKETûCONlDENCEûISûRATTLEDûBYûTHEû

potential impact of the coronavirus outbreak.

Doubts persist about their effectiveness

because the market chaos stems from a

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“My only thought here is that if this was a

2008-style credit crisis then it would

probably work, but it’s not,” said Kevin

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INCOMEûSTRATEGISTûATû

Raymond James Investment Service.

Giddis and other market players believe a

comprehensive plan to contain the virus and

BoE steps in with crisis plan, including with CCFF

As corporate borrowers begin to feel the effects

of distortions in the CP market, the UK Treasury

and Bank of England have announced the

Covid Corporate Financing Facility (CCFF) to

SUPPORTûCOMPANIESûlNANCINGûNEEDS

It was part of a raft of drastic measures

last week as central banks around the world

SCRAMBLEDûTOûlGHTûOFFûTHEûTHREATûOFûAûGLOBALû

recession. The BoE promised £200bn of

bond purchases and cut its key interest rate

to 0.1% in a second emergency move in just

over a week – the benchmark bank rate had

been 0.75% as recently as March 11.

They also voted unanimously to restart

buying government bonds and corporate

DEBTûFORûTHEûlRSTûTIMEûSINCEûûAûDAYûAFTERû

the European Central Bank ramped up its

debt-buying too. The £200bn increase, at 9%

of British GDP, was even bigger than the

ECB’s which was equivalent to 6% of the

eurozone’s economic output, and took the

BoE’s total asset purchase plan to £645bn.

Earlier, and with less fanfare, the BoE’s

move with CCFF is aimed at providing

funding to businesses through the purchase

of one-year and shorter commercial paper

issued by companies that make “a material

contribution to the UK economy”.

The scheme is designed to provide

working capital to companies facing

CASHmOWûCHALLENGESûBECAUSEûOFûTHEûIMPACTû

of the coronavirus.

Companies have been struggling to raise

new or even roll over CP, according to

bankers.

“You’ve seen news from some corporates

drawing on RCFs,” said one banker. “The CP

market is starting to be distorted with issuers

unsuccessful in raising new CP and some

investors even no longer rolling their CP.”

“IT WON’T COME CHEAP”

Borrowers have been renewing existing

revolvers in recent days. 3i Group, the

private equity and infrastructure-focused

investor for example, has just signed a

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YEARûFACILITY

/NLYûlRMSûTHATûWEREûINûGOODûlNANCIALû

health before the crisis will be able to access

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terms comparable to those available in the

market prior to the economic shock.

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ratings before the impact of the virus.

“By providing an alternative source of

lNANCEûFORûAûWIDEûRANGEûOFûCOMPANIESûTHEû

scheme will help to preserve the capacity of

the banking system to lend to other

companies, including small and medium-

sized enterprises, which rely on banks,” said

the BoE.

Note: Does not include actions on lending facilities swap

lines, interest rate cuts

Source: Reuters

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GLOBAL ECONOMIC RESPONSE TO A PANDEMIC

5 IFR PM 2325 p 13 - 22 .indd 18 20 / 03 / 2020 20 : 28 : 45